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By Jennifer Williams
President J Williams Personal Financial Planning 

Have you checked your retirement plan lately? – Part 2

Jennifer’s Thoughts

 
Series: Your retirement plan | Story 2

Regaining your balance

On the other hand, maybe you've concluded through your review that your original asset allocation is still appropriate for your needs, but your portfolio has strayed off track due to market performance. In this case, there are two ways to "rebalance" your portfolio.

The quickest way is to sell investments in which you are overweighted and invest the proceeds in underweighted assets until you hit your target. For example, if your target allocation is 75% stocks, 20% bonds, and 5% cash but your current allocation is 80% stocks, 15% bonds, and 5% cash, then you'd likely sell some stock investments and invest the proceeds in bonds.

Another way to rebalance is to direct new investments into the underweighted asset classes until the target is achieved. Using the example above, you would direct new contribution dollars into bond investments until you reach your 75/20/5 target allocation. Then you would adjust your allocation for future contributions back to that original allocation. This process may take a little longer, helping you ease back to your original target, but the same result will be achieved.

Revisit your plan rules and features

Finally, an annual review would not be complete without a fresh look at your employer-sponsored plan documents. Check those documents to make sure you fully understand how your plan works, and to see if there are any additional plan features that can help you better pursue your retirement savings goal.

For example, if your plan offers a Roth account and you haven't investigated its potential benefits, you might consider whether directing a portion of your contributions into it might be a good idea. Roth accounts do not offer a tax benefit at the time you contribute, but qualified withdrawals are tax free.¹

Also consider how much you're contributing in relation to plan maximums. Could you add a little more each pay period? If you increase your contribution by just a percentage point or two, you may not even notice the difference in your paycheck. But over time, that small amount can potentially add up through the magic of compounding.

If you're 50 or older, you might also review the rules for catch-up contributions, which allow those approaching retirement to contribute more than younger employees. (Special rules apply to 403(b) and 457(b) plans.)

A little maintenance goes a long way

Although it's generally not a good idea to monitor your employer-sponsored retirement plan on a daily, or even monthly, basis, it's important to take a look at least once a year to account for any changes in your life, your retirement income needs, or your risk tolerance and make any necessary changes to your asset allocation. You'll also want to make sure you're taking full advantage of the opportunities offered with your plan, if they make sense for you. With a little annual maintenance, you can help keep your plan on track.

¹A qualified withdrawal from a Roth account is one that is made after a five-year holding period and you either die, become disabled, or reach age 59½. Nonqualified withdrawals from Roth accounts are subject to regular income tax and a 10% tax penalty (to the extent the withdrawal represents earnings).

The classic definition of a correction is a decline of 10% or more in a stock index. A bear market is a downturn of 20% or more in several broad market indexes, typically over a period of several months or longer.

Asset allocation does not guarantee a profit or protect against a loss; it is a method used to help manage investment risk.

All investing involves risk, including the possible loss of principal, and there can be no assurance that any investment strategy will be successful.

Investments offering a higher potential rate of return also involved a higher level of risk.

Article courtesy of Forefield. Securities offered through NPB Financial Group, LLC. A Registered Investment Advisor/Broker-Dealer Member FINRA, MSRB, and SIPC

 
 

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